Article by Erik Smith/ Washington State Wire. Published on Friday, February 12, 2010 EST.
Two Final Forecasts This Week Add $214 Million to the State’s Budget Woes
By Erik Smith
Staff writer/ Washington State Wire
OLYMPIA, Feb. 12.—And now the official number is $2.8 billion.
That’s the size of the hole in the state budget lawmakers must fill this year, and for once it’s not going to get any deeper. Forecasters for state government have offered their final projections for the 2010 legislative session, and one of the most important elements of this year’s budget debate has finally been settled.
For those keeping score, the size of the state’s projected shortfall grew $214 million this week, rising from the $2.6 billion figure that has been cited by everyone from the governor to the state Legislature since last December. On Wednesday the state caseload forecast council released a projection that showed the state’s expenses rising by about $96 million, most of it because of increased staffing costs in the K-12 education system.
And on Friday, the state’s top economist, Arun Raha, released a tax-revenue projection that ratcheted down his expectations by another $118 million.
So now it’s all settled, and lawmakers can get to work raising taxes, slashing spending, raiding dedicated accounts and everything else they need to do to balance the budget. Victor Moore, director of the governor’s budget office, looked at the clock immediately after Raha released his numbers. “All the moving pieces have stopped moving as of 10:45 a.m. on Friday,” he said.
Revenue Down Again
For at least six months all Olympia has awaited the turnaround in the economy that everyone knows is just around the corner. But Friday’s tax-revenue forecast showed that the corner is still somewhere down the road apiece.
Tax revenue actually is improving, Raha said. But the state has to consider the fact that it will have to make a whopping $59 million in refunds because of a tax case decided late last year by the state Supreme Court. At the same time, the state will face another $95 million expense if it doesn’t close the tax loophole that the decision created.
Lawmakers say that’s a no-brainer. “Nothing at the legislative level is a foregone conclusion,” said Ross Hunter, D-Medina, chairman of the House Finance Committee. “But there is broad agreement in the budget-writing team, and I would expect us to do that.”
The Supreme Court decision concerned an out-of-state wholesaler, Dot Foods of Illinois, which does business in the state of Washington. The court ruled that a tax exemption had been applied too narrowly. Dot gets a $2.6 million refund, but every other wholesaler that falls into the same category gets a refund as well.
If lawmakers completely eliminate the exemption and the $95 million expense, Raha’s forecast would show that the state is down $23 million. That’s chump change by comparison with the multi-billion-dollar drops in state tax revenue that began with the Wall Street meltdown in late 2008.
Bumping Along the Bottom
In fact, Raha noted, if the state didn’t have to make the refunds, his forecast for once would have been positive. Actual revenue from taxes, generated by business activity in the state of Washington, is up $31.5 million from his last forecast. That’s a sign that the economy has begun to recover from the deepest recession since the Great Depression.
“At the present, revenues are bumping along the bottom and the recovery faces head winds, and we’re not out of the woods yet,” he said.
He said many sectors of the state economy remain depressed, particularly the market for new office construction. “When you can buy prime Washington Mutual office space for 30 cents on the dollar, why build?”
And he said it will be another two years before tax revenue and employment reach the levels enjoyed by the state of Washington in 2008.
“Now comes an urgent request,” he said. “Please buy a house or a strip mall. Either of those would help my forecast.”
Caseloads Up
In the other key forecast used by state officials, the caseload forecast earlier this week showed an additional expense of $96 million. About two-thirds of that came in the state’s basic education system. Huge increases in Medicaid costs and other safety-net programs already were reflected in the numbers released late last year. But the new number, in a sense, also is the result of the recession.
School districts facing layoffs have tended to target teachers who have been on staff a shorter amount of time. The higher-seniority teachers who stayed typically receive higher benefits. State officials said they missed that point when they made earlier forecasts, and the difference threw off the calculations.
A Partisan Reaction
Often legislative budget leaders issue statements of reaction after a budget forecast. But lawmakers dashed back to the House and Senate floors after the forecast was announced and by 2:30 p.m. only one statement had been released, this one from Republican Sen. Joe Zarelli of Ridgefield.
“It appears the bottom of this economic downturn is in sight after two years of falling revenue projections, but the chief economist figures it will be two more years before employment in our state returns to what it was in February 2008. That only reinforces my position that we should be looking at the upcoming supplemental budget with the next three years in mind, not just the remainder of this year.
“The key to bringing fiscal stability back to government, while sending a positive signal to the job creators in our state, is to move the level of state spending toward the level of revenue – not the other way around. If the revenue level has flattened out, as today’s forecast suggests, then we have a target to aim at on the spending side. It was a mistake to prop up the spending level last year with one-time federal money; to now rely on revenue from new taxes to maintain spending at a particular level would be a losing proposition over the long term, because it would stunt our economic recovery.
“I realize the majority party is positioning itself for hundreds of millions of dollars’ worth of tax increases, but it’s not too late to pull back and shift its focus to peeling away the ‘outdated and costly layers of government,’ as the governor put it last month. Our ideas for reforming government and giving employers reasons to hire may be opposed by powerful organizations outside the Legislature, but they make sense if the goal is to protect taxpayers and get our state’s working people back to work.”
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